OBBBA’s New 1099 Filing Rules
- Viktoriya Barsukova, EA, MBA
- Sep 13
- 5 min read
The IRS requires that information returns on Form 1099-NEC be filed when payments above a certain threshold amount are made by businesses to independent contractors.
Payments processed by third-party settlement organizations such as PayPal must report on Form 1099-K if over a threshold.
The One Big Beautiful Bill Act (OBBBA) changes the thresholds for filing these forms, which will result in far fewer being filed.
New $2,000 1099-NEC Filing Threshold OBBBA’s New 1099 Filing Rules
Currently, if a business pays an unincorporated independent contractor (non-employee) $600 or more for services during the year by check, cash, or direct deposit for business-related services, it must file IRS Form 1099-NEC, telling the IRS how much it paid the contractor.¹
The form must also be filed when a lawyer or physician is paid $600 or more for business-related professional services, even when they are incorporated.²
The IRS can impose a fine of $310 per 1099-NEC if you fail to file the form (less if you file late). If the failure is due to intentional disregard of the law, the penalty jumps to at least $660 per form or 10 percent of the reported amount, whichever is greater, with no maximum.³
Potentially even more serious, you’ll be subject to severe penalties if the IRS later audits your business and determines that your business misclassified the worker involved as an independent contractor instead of an employee. Your business will be required to pay the IRS twice as much in penalties for the misclassification—that is, had it filed the 1099-NEC forms, it would owe half as much.⁴
The $600 threshold for filing Form 1099-NEC was originally established in 1954 and never indexed for inflation. That’s about to change thanks to the OBBBA.
Starting in 2026 (that is, for payments made in 2026 and later), the threshold for filing Form 1099-NEC goes up to $2,000. Moreover, starting in 2027, the threshold will be adjusted for inflation each year in $100 increments.⁵ This should substantially reduce the number of 1099-NEC forms hiring firms have to file each year, relieving them of an administrative burden.
The $2,000 threshold for 2026 and later also applies to backup withholding of 24 percent by hiring firms. Such withholding is required when an independent contractor fails to provide a valid Form W-4 or Form W-9 using the contractor’s correct taxpayer identification number.
The $2,000 threshold will also be adjusted for inflation each year starting in 2026.
Exception to 1099-NEC Reporting
A business never has to file a 1099-NEC, however much the amount involved, if it pays an independent contractor⁶:
through a third-party settlement organization (TPSO) such as PayPal or Payable,
by credit card, or
by debit card.
Such payments are reported by the TPSO on Form 1099-K as described below.
Form 1099-K Filing Thresholds
IRS Form 1099-K, Payment Card and Third Party Network Transactions, is used to report payments from third-party settlement organizations (TPSOs) as well as debit card payments.
TPSOs include:
payment apps like PayPal, CashApp, and Venmo;
online auction or marketplace services such as eBay and Amazon;
gig economy platforms such as Uber, Airbnb, Upwork, and TaskRabbit;
some cryptocurrency processors such as BitPay;
craft or maker marketplaces like Etsy;
ticket exchange or resale sites like TicketMaster; and
some crowdfunding platforms.
Short History
When Form 1099-K first came into use in 2011, TPSOs were required to report payments for goods and services they processed for customers only if the recipient had⁷:
gross annual earnings over $20,000, and
more than 200 transactions in the calendar year.
With these thresholds, only relatively frequent users of TPSOs exceeded both thresholds and had their payment information reported to the IRS. This left a big income reporting hole.
When Congress enacted the American Rescue Plan Act of 2021, it amended the law to require that TPSOs file Form 1099-K to any payee who was paid more than $600 during the year with no minimum transaction requirement—the same rule applicable to the filing of Form 1099-NEC.⁸
This change was supposed to take effect for the 2022 tax year, but it never happened.
The IRS delayed implementation multiple times, leaving the $20,000/200 transaction threshold in place for 2022 and 2023. A $5,000 threshold with no minimum transactions applied for 2024. The threshold for 2025 was supposed to be $2,500. The $600 threshold was supposed to take effect in 2026.
OBBBA’s New 1099 Filing Rules
New Law
Now, as a result of the OBBBA, the $600 threshold will never take effect. Instead, beginning now in 2025, 1099-K reporting reverts to the old threshold. That is, a TPSO needs to file a 1099-K only if a payment recipient has⁹:
gross annual payments from the TPSO over $20,000, and
more than 200 transactions with the TPSO in the calendar year.
This change was made retroactive to the date of enactment of the American Rescue Plan Act in 2021.
As a result, the $2,500 threshold for 2025 is no longer in effect. Those who failed to file 1099-Ks for payments over $5,000 in 2024 need not worry—1099-Ks are now not required for 2024 or earlier unless the $20,000/200 transaction threshold was met.
This restores a large reporting gap for TPSO payments. For example, if a contractor is paid through PayPal but has fewer than 200 transactions or less than $20,000 in annual TPSO payments, no 1099 is filed at all.
Of course, all taxpayers are supposed to report all their income whether or not reported on a 1099. But in practice, compliance drops sharply without third-party reporting. The IRS estimates 55% of non-reported income goes unreported, versus only 6% when a 1099 is issued.¹⁰
State 1099-K Reporting Rules
Ten states and the District of Columbia abandoned the federal $20,000/200 transaction threshold and imposed lower thresholds.
State | 1099-K Filing Threshold |
Arkansas | $2,500 |
District of Columbia | $600 |
Illinois | $1,000 and 4 or more transactions |
Maryland | $600 |
Massachusetts | $600 |
Montana | $600 |
New Jersey | $1,000 |
North Carolina | $600 |
Rhode Island | $100 |
Vermont | $600 |
Virginia | $600 |
It is unclear whether any of these states will amend their laws to conform to the new federal threshold.
Form 1099-MISC
Form 1099-MISC used to be filed to report payments to independent contractors, but this ended in 2020. Today, Form 1099-MISC is used to report non-wage income not covered by another 1099 form.
Examples include legal settlements, prizes, and rent. Form 1099-MISC will be subject to the same $2,000 threshold as Form 1099-NEC for 2026 and later.
Takeaways
Businesses that hire independent contractors during 2025 must file a 1099-NEC if payments total $600 or more. The new $2,000 threshold begins for payments made in 2026.
TPSOs like PayPal must file Form 1099-K only if the recipient receives more than $20,000 or has more than 200 transactions. This rule is retroactive to 2022. The 2025 $2,500 rule is eliminated.
Several states have lower 1099-K filing thresholds than federal law. It is unclear whether they will adjust.
References
IRC Section 6050W; Instructions for Forms 1099-MISC and 1099-NEC (Dec. 20, 2024)
IRC Section 6050W(e) (as originally enacted)
One Big Beautiful Bill Act (P.L. 119-21), Section 70432(a)
IRS Pub. 1415, Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2014–2016, p. 13
By: W. Murray Bradford, CPA
Publisher
Tax Reduction Letter
Comments